EMC 2004 Annual Report Download - page 65

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Table of Contents
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
estimated using a Black-Scholes option-pricing model. The fair value of the stock options was estimated assuming no expected dividends and the following
weighted-average assumptions:
Expected life (in years) 4.0
Expected volatility 60.0%
Risk-free interest rate 2.0%
The intrinsic value allocated to the unvested options issued in the acquisition that had yet to be earned as of the acquisition date was $47.3 million and has
been recorded as deferred compensation in the purchase price allocation.
The consolidated financial statements include the results of VMware from the date of acquisition. Pro forma results of operations for 2004 have not been
presented because the effects of the acquisition were not material to us. Pro forma results of operations for 2003 appear on page 67. The purchase price has
been allocated based on estimated fair values as of the acquisition date (table in thousands):
Current assets $ 18,644
Property, plant & equipment 2,472
Other long-term assets 1,520
Goodwill 527,273
Intangible assets:
Developed technology (estimated useful life of 4 - 5 years) 93,610
Support and subscription contracts (estimated useful life of 9 years) 3,950
OEM contracts (estimated useful life of 5 years) 5,570
Tradenames and trademarks (estimated useful life of 5 years) 7,580
Non-solicitation agreements (estimated useful life of 3 years) 40
Acquired IPR&D 15,200
Total intangible assets 125,950
Deferred compensation 47,300
Current liabilities (85,040)
Deferred income taxes (21,337)
Long-term liabilities (3,670)
Total purchase price $ 613,112
In determining the purchase price allocation, we considered, among other factors, our intention to use the acquired assets, historical demand and estimates
of future demand of VMware's products and services. The fair value of intangible assets was primarily based upon the income approach. The rate used to
discount the net cash flows to their present values was based upon a weighted average cost of capital of 14%. The discount rate was determined after
consideration of market rates of return on debt and equity capital, the weighted average return on invested capital and the risk associated with achieving
forecast sales related to the technology and assets acquired from VMware.
The total weighted-average amortization period for the intangible assets is 4.8 years. The intangible assets are being amortized based upon the pattern in
which the economic benefits of the intangible assets are being utilized. None of the goodwill is deductible for income tax purposes. The goodwill is classified
within our VMware products and services segment.
Of the $126.0 million of acquired intangible assets, $15.2 million was allocated to IPR&D and was written off at the date of acquisition because the
IPR&D had no alternative uses and had not reached 62